Mortgages Why Interest Only Can Be A Risky Option

Mortgages Why Interest Only Can Be A Risky Option



Mortgages .​
Why Interest Only Can Be a​ Risky Option
The Council of​ Mortgage Lenders’ figures are showing a​ growing trend in​ interest only mortgages .​
From January to​ March 2002,​ 9% of​ new mortgages were interest only .​
Now take the​ period from October to​ December 2018,​ and the​ amount of​ new interest only mortgages has risen to​ 23% .​
In the​ same timeframe,​ the​ number of​ first time buyers choosing interest only mortgages has increased from 6% to​ 15%.
There’s a​ good reason for this upturn,​ and that’s because the​ monthly payments are so much lower than with a​ repayment mortgage .​
All you​ have to​ do is​ pay the​ interest,​ delaying the​ repayment of​ the​ capital itself until the​ end of​ the​ mortgage term when it​ is​ paid off in​ full.
Getting an​ interest only mortgage is​ an​ easy way to​ avoid having to​ change lifestyle habits like eating out and holidays – and having a​ mortgage is​ incredibly affordable this way .​
However,​ we think that there could be a​ lot of​ people in​ trouble in​ the​ future when they realise that they didn’t start saving soon enough for this eventual lump sum payment.
The Financial Services Authority (FSA) have voiced concerns about homebuyers potentially getting an​ interest only mortgage and not making sufficient provisions to​ pay off the​ capital,​ so as​ a​ result mortgage lenders have tightened up the​ rules on​ interest only mortgages .​
Now you​ need to​ provide proof of​ an​ alternative savings fund to​ cover the​ capital,​ before they will agree to​ lend you​ the​ money .​
The most common ways to​ save include pensions and ISAs,​ regular payment schemes that could potentially save more than the​ capital required .​
Of course,​ they may also fall short .​
The main danger is​ that the​ homebuyer will go and cancel the​ savings plan once the​ mortgage has been agreed.
If a​ borrower decides not to​ save money to​ cover the​ capital,​ the​ only option would be to​ sell the​ home and then buy a​ home of​ less value when the​ time comes to​ repay the​ capital .​
This is​ not a​ scenario that the​ FSA and lenders want to​ be faced with,​ especially as​ property prices cannot be depended on.
Back in​ the​ 1970s and 1980s interest only mortgages were very popular – homebuyers would take out an​ endowment policy to​ cover the​ capital repayment at​ the​ end of​ the​ term .​
However,​ we all heard in​ the​ news recently about endowment policies under-performing – many borrowers were not able to​ cover the​ capital because of​ an​ endowment shortfall .​
They were considered to​ be a​ ‘guaranteed’ way of​ saving,​ but they did not fulfil their promise .​
In a​ similar way,​ there’s no way to​ be sure that an​ investment product will have performed as​ well as​ is​ needed when it​ comes to​ paying back the​ capital in​ 20 years time.
As people realised that the​ endowment policies had under-performed,​ the​ whole concept of​ getting an​ interest only mortgage with a​ separate savings vehicle fell out of​ favour,​ and now repayment mortgages are the​ norm .​
But from the​ recently published statistics mentioned earlier in​ this article,​ it​ looks like the​ tide may be turning again .​
For some people it’s the​ only option .​
House prices are too high for many people to​ be able to​ afford the​ full repayment mortgage payments.
So it​ looks like interest only mortgages will be becoming a​ lot more popular again,​ but we think that mortgage lenders could do more to​ help homebuyers see the​ other options available to​ them .​
For example,​ a​ mortgage doesn’t have to​ be over 25 years – the​ term can be extended to​ 30 or​ even 35 years,​ which would help lower the​ payments on​ a​ repayment mortgage considerably.
A 25-year repayment mortgage of​ £125,​000 at​ 4.9% will cost £731.69 per month .​
Stretch the​ mortgage over 35 years instead,​ and the​ monthly payment is​ £103.53 less at​ £628.16 .​
That can make the​ difference between a​ mortgage being not affordable and affordable.
Many mortgages now offer the​ option of​ overpaying when you​ can .​
So just because a​ mortgage is​ over 35 years,​ it​ doesn’t mean it​ will take 35 years to​ pay it​ off .​
Many homebuyers move house every eight to​ ten years as​ well,​ so the​ mortgage never needs to​ run its full course .​
It’s then a​ good opportunity to​ reassess how much you​ can afford on​ monthly repayments.
There are other options too,​ like a​ mortgage in​ which you​ repay half of​ the​ capital on​ repayment,​ and the​ rest at​ the​ end .​
It means you​ get a​ head start on​ repaying the​ capital,​ and the​ mortgage can always be renegotiated if​ you​ feel you​ can afford to​ pay more each month.
Our most serious advice is​ this – don’t try and make a​ decision about something as​ important as​ a​ mortgage without getting advice from a​ professional first .​
There are a​ number of​ solutions so it​ is​ always best to​ get the​ whole picture from someone who knows the​ market well.




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